Daimler AG: The Year That Was And Looking Ahead

BMW retained the global luxury vehicle sales crown for the tenth consecutive year in 2014, fending off both compatriots Volkswagen AG’s (OTCMKTS:VLKAY) Audi and Daimler AG‘s Mercedes-Benz. However, Audi and Mercedes narrowed their respective gaps with BMW, which sold a record 1.81 million units last year, up 10% year-over-year. In particular, Mercedes’ volume growth of 13% last year meant that the automaker’s gap with BMW shrank to 91,000 unit sales from 114,000 in 2013. ^[1] Mercedes is in hot pursuit to take over the worldwide luxury sales lead before the end of this decade, and the company plans to launch at least eleven new models (with no predecessors) before 2020 as a part of its product offensive strategy. Of course the high start-up costs and R&D expenses related to their growth offensive strategy will weigh on the profitability of the premium vehicle division, which formed almost half the operating profits for the Daimler Group in Q3. Lower margins would stall cash flow growth for the company in the near to mid term, slightly offset by the growth in volume sales, which should add to the bottom line.

One-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% a couple of years ago, but a favorable product mix and efficiency initiatives such as the ‘Fit for Leadership’ program has helped Mercedes sequentially improve its profitability. Operating margins for the German company stood at 7.8% through September, with the figure improving to 8.5% in Q3. However, the operating performance at Mercedes still lags that of BMW and Audi, which reported margins of 10.2% and 9.7% respectively through the first three quarters. Increasing volume sales on the back of new model launches is one way Mercedes could close-in on its compatriots in terms of profitability. The company lost its lead in the U.S. to BMW last year, despite record sales, and will look to draw high growth from its single largest market going forward. One of the other key ploys for Mercedes to boost margin growth in the long term could be by expanding its production footprint, especially in low-cost countries and countries with a fast growing luxury vehicle market, so that the cars could be built near the end customers.

We have an $85 price estimate for Daimler AG, which is roughly 3% above the current market price.

See Our Complete Analysis For Daimler AG

Mercedes Plans To Launch More SUVs In 2015

According to Daimler’s Chief Executive Officer Dieter Zetsche, Mercedes will launch four new or revamped SUVs this year, in a bid to further penetrate one of the fastest growing segments in the luxury vehicle market. Unit sales of premium SUVs rose 14.2% year-over-year in 2014 in the U.S., representing the highest growth in any vehicle segment. Premium SUVs still form only 1.2% of the country’s vehicle market, and with a growing demand for luxury vehicles, especially crossovers, this segment could continue to expand. The U.S. automotive market crossed 16.5 million volume sales last year, up 6% from 2013 levels, and on account of lower energy prices and increasing disposable incomes, automotive demand is expected to remain strong in 2015.

After stalling in Q1 2014 hurt by extreme weather conditions, the U.S. GDP grew 4.6% and 5% in the next two quarters respectively, and is estimated to grow by approximately 3% in 2015. Unemployment rates are below 6% and oil prices have dropped to below $50 per barrel, boosting consumer purchasing power. Although the U.S. premium vehicle market is relatively mature, growth lies in potential upgrades to luxury vehicles and/or replacement of aging vehicles in the region. In fact, the average age of a passenger car in the U.S. reached 11.4 years in 2013, while the average age stood at 8.4 years in Europe and below 5 years in China. Sales of luxury vehicles, especially SUVs/crossovers could continue to grow in 2015. The U.S. is the largest market for Mercedes-Benz, and the brand sold 330,391 units in the country last year, up 6% year-over-year.

Mercedes renamed its M-Class model lineup to GLE-Class last year, and recently introduced the GLE Coupe, combining the looks of an SUV and a luxury coupe. Crossovers have become popular in recent years as they provide both the functionality of a utility vehicle and the comfort and design of a car. The GLE Coupe will compete with the new model year BMW X6 (launched in December) in the U.S., aiming to add incremental sales for Mercedes.

Local Production To Boost Profitability

The compact sedan C-Class, the new version of which was launched last year, continued to be the top volume model for Mercedes, constituting almost one-fifth of the net volumes for the brand last year. The C-Class is Mercedes’ first model to be produced in four continents, reflecting the high demand for compact luxury vehicles worldwide, and also the company’s commitment to draw cost-benefits from local production. The model was being manufactured in Germany and South Africa, and production in the U.S. and China began mid-last year. Sales for the C-Class increased by nearly 50% last month and with full availability of the model’s new versions, Mercedes expects additional sales momentum going into 2015.

Expanding production in low-cost countries is expected to push margin-growth for Mercedes going forward. The brand extended its partnership with the Japanese automaker Nissan to jointly build compact luxury models in Mexico last year. ^[2] The Renault-Nissan Alliance and Daimler will establish a 50-50 joint venture, which will oversee construction and operations of the new manufacturing facility in Aguascalientes, Mexico. The plant will start production of Nissan’s Infiniti line of premium vehicles in 2017, with production of Mercedes-Benz vehicles set to begin in the plant in the following year. Mexico only ranks 16th in the world in terms of annual vehicle sales, but the country has emerged as an auto export hub, bolstered by lower wages, raw material, and operational costs. Mercedes could utilize the Mexico plant to feed the luxury demand in North America, particularly in the U.S.  In addition, the company could earn higher profits on incremental sales due to lower costs of production in Mexico, as well as reduced product development and production costs owing to joint manufacturing with Nissan. This is expected to bolster margin-growth for the German automaker going forward.

In addition, Mercedes is also extending its partnership with the Chinese BAIC Motor, to further its business in China, which overtook Germany to become the brand’s second largest market behind the U.S. The joint venture’s manufacturing plant at Beijing already produces the C-, E-, and GLK-Class models, and will now start producing the compact crossover GLA-Class this year. ^[3] Daimler will invest around $1.27 billion for the localization of additional compact sedans other than the GLA in China. Both the companies will jointly invest around $5 billion through 2015 to increase automotive production in the country. ^[4] This means that by some time this year, Mercedes will start selling locally assembled compact entry-level premium models in China. This bodes well for the company, which will benefit from evading the 25% import taxes, consumption and value-added taxes in the country on account of local production, and the large demand for entry-level vehicles could significantly boost China volumes for Mercedes. IHS automotive expects compacts to constitute 20% of all luxury vehicle sales this year in China, as customers flush with cash look to trade-in their large non-luxury sedans for entry-level premium vehicles.

While Mercedes could further close-in on BMW and Audi in terms of volumes in 2015, local production and high volume sales in key markets could also help the automaker narrow the gap with its competitors in terms of margins this year.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Daimler press release [↩]
2. Daimler press release [↩]
3. Daimler press release [↩]
4. Daimler press release [↩]